We are heading for the sharpest recession on record, with the economy set to shrink 14% this year. The Bank of England has warned Covid-19 is “dramatically reducing jobs and incomes in the UK,” and the FTSE 100 has taken a massive hit too.
So how come equities have recovered so quickly from the stock market crash in March? The main reason is that central bankers around the world have effectively ‘backstopped’ share prices, through unprecedented fiscal and monetary stimulus. Largely thanks to their efforts, the FTSE 100 has climbed more than 20% since dipping below 5,000.
The FTSE 100 is holding firm
The bloodbath’s been averted. Investors can breathe a sigh of relief, but they’ll also be wary. They know we haven’t felt the full force of the downturn yet. Government furlough schemes are hiding the fact that many people will not have a job this autumn. Unemployment is set to rise sharply.
Companies will continue to struggle after the lockdown is over as nervous consumers are likely to be more cautious. Revenue and earnings will fall. More FTSE 100 dividends could be cut. All this will weigh on stock markets.
There’s also the danger of a second wave of the pandemic when winter comes. Another lockdown would be a serious blow to the economy. The government will have to balance the threat to health against the economic damage, while anger mounts on both sides of the political divide.
Another stock market crash is possible
The uncertainty is likely to drag on until we can finally get a vaccine. So who would buy FTSE 100 shares given today’s worries?
I would. Although I’d do it carefully. I don’t have the courage go hunting for FTSE 100 bargains in bombed-out sectors, such as airlines and cruises, right now. That trade might pay off, but I’m unwilling to take on that level of risk.
Instead, I’d focus on top FTSE 100 companies with healthy balance sheets, loyal customers, strong cash flows, and affordable debt levels. These are best placed to survive an extended downturn, and even take advantage by snapping up struggling rivals.
Stocks can survive the recession
Right now, there are plenty of FTSE 100 companies that fit this profile. Today can still be a good time to go shopping for shares, if you do it selectively. You should aim to hold for the long term, allowing time for current uncertainty to pass.
But you don’t have to rush out and buy them. Plenty of people are building up a cash position, ready to take advantage if we do get a second stock market crash.
However, I wouldn’t leave money in cash for an extended period. Over the longer run, its real value will be eroded by today’s low interest rates. When you see a FTSE 100 stock you like at a decent price, I’d buy it.
As stimulus kicks in, share prices could rise sharply, even in a recession. While you should be wary of another crash, you don’t want to miss the stock market recovery either.
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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.